Disability Insurance Claim Advice
Disability Claims...Shooting from the hip may be okay for the hero in a western movie. It may look good, but it might not hit the mark
Health Insurnce Underwriter (N.A.H.U.), April 2004
By Art Fries
When you submit a disability claim, you must hit the mark. This means that you or your client must submit information to an insurance company with no mistakes and you must present a clear picture of your medical problem thoroughly and indisputably backed up by medical evidence. Once you submit the initial claim forms, you must continue to hit the mark in everything you do in order to avoid problems. “Shooting from the hip” just doesn't work when it comes to disability claims.
Penalties for Shooting from the Hip
That's simple: the insurance company declines your claim or terminates your claim at a future date.
“Hey, I paid premiums. My broker/agent said I have a good policy with a good company. I thought I even heard said that this was the ‘Cadillac' of disability policies. I'll sue!”
Oh, really? Are you sure what you're up against?
What a Lawsuit Means in the Real World
You contact your attorney. That attorney may or may not be adequately experienced in handling disability claims. If he is not experienced, he may settle for too little money, too early in the process. If experienced, he may do a terrific job in representing you and might effectuate a settlement in your favor without having to go to court.
But if your attorney and the insurance company attorney cannot agree, both sides prepare for trial. This means a lot of additional paperwork requested by the insurance company during the discovery process, depositions by both sides, and a tremendous amount of physical and emotional time on your part. In many situations, the parties to the lawsuit will settle prior to going to trial. But there are also times when neither side can agree because both feel very strongly about the claim.
Regardless of the outcome, filing a lawsuit is an expensive endeavor. Assume your or your client's case never gets to trial. Even in this situation you could run up $40,000 to $80,000 in costs and fees advanced by your attorney which is subtracted from any gross settlement amount you might receive. This is in addition to the 30% to 40% (typical) “contingency fee” that the attorney representing you will charge before actual costs are even deducted.
Assume $1,000,000 of potential benefits and you settle for $600,000, gross. Applying a 40% contingency fee ($240,000) and actual costs of $60,000 leaves you with a net settlement amount of $300,000... or 30% of the potential $1,000,000 payout!
Additionally, the path a lawsuit can take is never straight. Let's say neither you nor your insurance company wants to settle and you go to trial. If you reside in a state that permits you to sue for “bad faith” (punitive) damages that is money above and beyond the compensatory damages (what your policy is worth in terms of a monthly benefit), you can include that aspect of the claim in your initial lawsuit. Or you might have to wait until you win the compensatory damages before you can bring an action for bad faith. Or you may be located in a state that does not recognize bad-faith lawsuits under any circumstances.
When a lawsuit is first presented, most times it will involve your local district court. In most cases the insurance company will get the case moved to federal court on the basis that its home office is not located in your state. What is important here is that federal court judges tend to be more conservative when it comes to considering punitive damages.
Further, if your claim for punitive damages is denied, you cannot discuss anything in the trial that concerns bad faith on the part of the insurance company or its actions related to other claimants and/or lawsuits in the past. You can only talk about the compensatory issues (language of the policy) at trial.
The Long and Winding Trial
The trial to resolve a DI case can involve several days, perhaps a week or even longer. Witnesses and expert witness (who charge large sums of money) are called in to participate in the trial. In this situation, costs can run an additional $50,000 or more. Again, you are responsible for covering these costs. And these relate only to your attorney. So what happens if you lose?
You may also be required to pay the costs of the insurance company attorney (and their related costs). This could amount to $100,000 or more. And, in federal court, you must have a unanimous decision on the part of the jury in order to win—in contrast to district court where you need only a majority to win.
Who sits on the jury panel? Typically, I've found jurors to be retired people, unemployed persons and those who earn a lot less money than you or most of your clients. You won't find all college graduates on this panel!
The jury panel will take into consideration what you are doing now in the way of employment. For example, say you were a surgeon with a “your occupation” definition in your policy but you developed a problem in one of your hands that prevents you from practicing as a surgeon since two good hands are required.
After going on a claim for total disability, you decide to go to law school and become an attorney earning $500,000 per year after overhead. Your DI policy, from a contractual standpoint, may say you are entitled to compensation since you can no longer perform the functions of a surgeon. But an individual sitting on a jury panel earning $40,000 per year or less—or not employed-—is not going to be too excited about you collecting a “windfall” of money from the insurance company while earning a great living from your new job as an attorney.
And then you look pretty good sitting in front of the jury because you are not a “basket case” from a physical standpoint. The jurors can't see or feel your disability. You won't see too many people who sit on juries who also own an individual your-occupation Dl policy or one of the policies issued in the “go-go” 80s with a specialty letter.
More likely, those on the jury will either have no disability coverage or group disability with an “any occupation” definition with restrictive policy wording and offsets. Even with the best instructions provided to the jury by the judge, that jury can still be prejudiced by its beliefs and emotional feelings with respect to you receiving money from the insurance company.
If the jury cannot all agree on your case, you have what is called a “hung jury.” That means you either go another round in court at a future date (a new trial), with further added costs—or you might attempt to settle.
Conversely, let's say you or your client was lucky enough to win in the first trial. You may want to bring up the bad-faith action that you lost in round one. In this scenario, the insurance company will appeal the first trial decision (which you won) as well as defend against a bad-faith action if the court permits it.
But the cycle continues. Let's say you lose the second trial. Now you may be out of pocket the costs for the insurance company attorney related to the second trial, in addition to the original “other side” costs, and this can be in the area of another $150,000 by this point in time.
Let's say you win in this second trial and the jury awards benefits related to the compensatory damages (the policy value) as well as bad-faith damages. Some of the bad-faith damages on disability claims are quite high and the insurance company will usually appeal that decision (the bad-faith aspect of the claim).
So even if you were awarded $10,000,000 in bad-faith damages, the appeal will cause the case to drag on for another four, five or perhaps even six years—and you still haven't received even one dollar! These cases often get settled for a much lower figure as the years drag on.
Understand that a $40 million bad-faith award is what I call “monopoly money.” It's the stuff you read about in the newspapers. A case like that might ultimately settle for $7 million or so—not anywhere near the original award. By that time, unless you already had a large amount of money in the bank, economically you're dead. This is what a lawsuit is all about.
What's a Good DI Company
I regularly receive calls from brokers and agents asking me what is a good company for disability coverage with respect to how they pay claims. Or they might ask, “What is a good company that used to sell disability insurance that pays claims?”
If you define “good company” as one that doesn't ask many questions or doesn't ask for much paperwork and accepts everything your client and doctor says as the absolute truth, the answer is there aren't any good companies. In today's claim environment, almost all disability claims are handled vigorously and carriers relentlessly pursue information.
Some insurance companies take it one step further and use an arsenal of weapons as they try to get blood from a stone or “crawl into cracks” to make them wider. What you or your client may have expected when the policy was sold is very different from the reality of to how claims are handled today.
Policy Language Can Hurt You
Policy language indicating that you are covered for total disability if you cannot perform the “substantial and material duties of your occupation” may mean one thing to you or your client at the time of policy purchase, but at claim time mean something entirely different.
For example, say your dentist client cannot practice dentistry any longer because of cervical and low-back problems. He has a repetitive movement problem in these areas and takes medication for pain. He cannot work any longer with a high-speed drill since he is now a danger to his patients as well as himself.
He asks you if he can go to a law school and become an attorney since this is a completely different profession. You tell him his policy permits him to do so. However, you have not considered the side effects of medication he may be taking or the amount of pain that may continue if he doesn't take medication.
There may also be some deterioration related to both the cervical and low-back areas that will continue in spite of the fact that the policyholder no longer practices dentistry. For example, sitting in a classroom at law school, or working in a law office all day, may not meet all the “smell tests” for someone who indicates they can't sit or stand for long periods of time while performing the duties of a dentist.
Or your client may become a trial attorney and have to drive frequently to depositions or court and the length of time he spends in his car or stand in court may not meet the smell test. How your client acts post-disability with respect to business or social/athletic activities can make the difference between your client being paid on a disability claim or having the claim denied or terminated.
DI Remains “Must—Have” Coverage
In spite of all I have said related to disability claims, you should clearly understand that disability insurance is still an important product that is intended to provide cash flow to keep you or your clients financially secure in the event of a disability. In the absence of this cash flow, without access to a personal “money well,” you or your client can face economic suicide. An income is a valuable asset. The ability to generate an income is not guaranteed. The risk of losing the ability to produce an income is very real. DI protects against that risk.
Nonetheless, the vigorous claim-management practices being used by disability carriers and TPAs should be taken seriously. In the event of a serious claim, you and your clients should seek competent help. Shooting from the hip doesn't cut it. If you miss, you lose.
Getting help can reduce personal apprehension and provide the necessary handholding your client might need to make it through the long and tedious ordeal. It will also increase the chances of the claim being paid.
